by dday
Johnny, tell them what they've
bought 80% of:
Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.
The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank’s history.
With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman, Ben S. Bernanke, convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan. They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers initially expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.
Yes, that's right, you've got a troubled insurance giant with billions of dollars tied up in worthless pieces of paper masquerading as securities. Yours for the low low price of $85 billion dollars!
moreI hadn’t really ever thought that the Bush administration was going to wind up giving us the large scale nationalization of industry, but I’m not sure what else you call it when we follow up the deprivatization of Fannie and Freddie with the Fed
securing an eighty percent stake in AIG in exchange for giant loan that the company desperately needed. With the auto industry also clamoring for bailouts we’re perhaps moving in the direction of Lenin’s
New Economic Policy in which a market economy exists on small scales while the state controls the “commanding heights” of heavy industry and finance.
On a perhaps less jokey note, I’m a little surprised to learn that this is legal without some kind of legislation. It seems pretty far afield from the Fed’s traditional domain. I guess in a storm people don’t care about the niceties.
Meanwhile, these are some pretty big companies the government now owns and, among other things, this raises the question of how these companies are going to be run. There could be an effort to manage them in the broad public interest or out-of-control crony capitalism or something like the situation in present-day Russia. It seems to me that there this step has uncertain implications far beyond the world of high finance.
linkAs today's decision demonstrates, this New Deal law apparently gives an extraordinarily broad authority to the Fed to "discount" notes, drafts, and bills of exchange, without limit.
Recall also, unitary executive fans, that the Fed could have made this loan
over the objection of the President, although in this case the Treasury supports the Fed's decision.
UPDATE: David Zaring wonders, not about the legal basis for the loan, but about the legality of the conditions the Fed is imposing on A.I.G. According to the Fed:
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
Zaring asks: Loan authority, sure. But from where does the Fed get the authority to trade credit for equity? I would think that it is implicit in the statutory loan authorization that the Fed can insist on collateral in order to protect the taxpayers' interest -- and this is simply a dramatic example of such collateral, necessitated by the enormity of the loan itself. I am not at all familiar, however, with this statute or the way it has been construed and implemented for 75 years, so that's simply a guess.
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